HALSCOTT MEGARO, P.A. v. HENRY MCCOLLUM; LEON BROWN; RAYMOND TARLTON, аs guardian for Henry McCollum and individually; DUANE GILLIAM, as guardian for Leon Brown; KIMBERLY PINCHBECK, as guardian for the estate of Henry McCollum and individually
No. 22-1505
United States Court of Appeals, Fourth Circuit
April 18, 2023
RICHARDSON, QUATTLEBAUM, and HEYTENS, Circuit Judges.
PUBLISHED. Argued: January 25, 2023.
Affirmed in part, dismissed in part by published opinion. Judge Quattlebaum wrote the opinion, in which Judge Richardson and Judge Heytens concur.
ARGUED: Jaime Torre Halscott, HALSCOTT MEGARO, PA, Winter Park, Florida, for Appellant. Matthew J. Higgins, HOGAN LOVELLS US LLP, Washington, D.C., for Appellees. ON BRIEF: Elliot S. Abrams, CHESHIRE PARKER SCHNEIDER, PLLC, Raleigh, North Carolina; Liz Lockwood, ALI & LOCKWOOD LLP, Washington, D.C.; Catherine E. Stetson, E. Desmond Hogan, W. David Maxwell, Eric S. Roytman, HOGAN LOVELLS US LLP, Washington, D.C., for Appellees.
QUATTLEBAUM, Circuit Judge:
Law firm Halscott Megaro, P.A., (“Halscott Megaro” or “the firm“) sued former clients Henry McCollum, Leon Brown and their guardians (collectively “former clients“), seeking to recover unpaid legal fees and expenses. A district court dismissed the action under
Halscott Megaro appeals, arguing the district court improperly considered matters outside the pleadings—namely, the Commission‘s decision—and failed to accept its allegations and all reasonable inferences from them as true in concluding that the Commission‘s decision as to its lead partner bound the law firm. The firm also argues that the district court abused its discretion in denying its motion for recusal. We disagree. The district court committed no reversible error in granting the former clients’ motion to dismiss or in denying the law firm‘s motion for recusal. So we affirm.
I.
After intellectually disabled brothers Henry McCollum and Leon Brown served 31 years in prison for the rape and murder of an 11-year-old girl, the North Carolina Innocence Inquiry Commission tested DNA on a cigarette found at the crime scene. The DNA matched a serial rapist and murderer who lived close to where the girl‘s body was found. Based on these test results, and following a motion for appropriate relief, the Robeson County Superior Court vacated McCollum and Brown‘s sentences.
McCollum and Brown then pursued several legal proceedings based on their wrongful convictions. They sought and received pardons for their cоnvictions. They also petitioned for monetary awards permitted
This appeal involves a dispute between McCollum and Brown and the law firm Halscott Megaro, which represented McCollum and Brown. Halscott Megaro claims it helped McCollum and Brown obtain their pardons and statutory monetary awards. And it contends it negotiated a $1,000,000 settlement with the Town of Red Springs in the civil rights case.2 Finally, it claims it expended substantial hours and incurrеd significant costs in working that case until the firm was replaced by new counsel by the time of trial.
Halscott Megaro sued McCollum and Brown as well as Raymond Tarlton, McCollum‘s guardian; Duane Gilliam, Leon Brown‘s guardian; and Kimberly Pinchbeck,
the guardian for McCollum‘s estate in the circuit court in Orange County, Florida. Halscott Megaro alleged the guardians replaced the firm with new lawyers but failed to pay for any of the work the firm did or the expenses it incurred in the civil rights case.
In its state court complaint, Halscott Megaro alleged that McCollum, Brown and their sister Geraldine Brown Ransom—who the firm alleged to be the brothers’ “attorney-in-fаct“—asked Halscott Megaro to represent them. Halscott Megaro alleged that Michael Megaro, “as partner for Plaintiff law firm,” met with McCollum, Brown and Ransom regarding representation. J.A. 51. During the meeting, they signed a “retainer agreement,” which outlined a contingency fee arrangement and the duties to be performed by the firm. J.A. 52. Halscott Megaro then represented McCollum and Brown in seeking: (1) pardons of actual innocence with the Office of the Governor of North Carolina; (2) statutory compensation for wrongful convictions through North Carolina‘s Industrial Commission; and (3) damages for being wrongfully imprisoned in a
According to Halscott Megaro, shortly after securing the pardons and the statutory amounts for wrongful convictions, Megaro decided that Brown needed a guardian. So, he petitioned a North Carolina state court for one to be appointed. That court appointed Ransom as guardian. But later, the state court replaced her with Duane Gilliam because Ransom was mismanaging funds. Also, Halscott Megaro alleged that during the civil rights action, the district court appointed Raymond Tarlton as guardian ad litem for McCollum.
Tarlton then brought in Kimberly Pinchbeck as guardian of McCollum‘s estate. The firm alleges that later, McCollum and Brown replaced Halscott Megaro with different lawyers.
Halscott Megaro‘s complaint asserted a breach of contract claim against Brown and his guardian, Gilliam,3 and quantum
Once the case was before Judge Boyle, the former clients moved to dismiss Halscott Megaro‘s suit. In their motion to dismiss, the former clients argued that the district court should take judicial notice of the Commission‘s decision, that Halscott Megaro was bound by the decision since it was in privity with Megaro, and that Halscott Megaro was collaterally estopped from claiming breach of the retainer agreement. They also argued that the Commission‘s findings as to Megaro‘s ethical violations barred the firm‘s equitable claims based upon the doctrines of unclean hands and laches.
The Commission‘s decision, issued after a five-day evidentiary hearing where Megaro was represented by counsel, contained an order of discipline and factual findings. The Commission noted that “[m]inimal research on the cases of McCollum and Brown would have disclosed their significant intellectual disаbilities.” J.A. 28. It added that Megaro entered into the representation agreement with them and their sister Ransom, despite knowledge of the brothers’ diagnoses and low IQ scores. That agreement reflected that Megaro would collect a contingency fee of between 27-33% of any monetary recovery or award, and the Commission determined that it ultimately “created an impermissible nonrefundable fee.” J.A. 29.
Additionally, the Commission found that Megaro “performed minimal work on behalf of McCollum and Brown” to obtain their statutory monetary awards. J.A. 31. Yet, Megaro took a one-third fee from the awards of both McCollum and Brоwn, repaid high-interest loans he facilitated for them and charged other costs, expenses and repayments. And with respect to the settlement with the Town of Red Springs, the Commission noted that Megaro sought even more fees. The Commission explained that, in the district court‘s consideration of a motion to approve that settlement, the presiding district court judge in the civil rights action found that McCollum was not competent to manage his own affairs and that Megaro‘s “representation agreement with McCollum was invalid due to McCollum‘s incompetency.” J.A. 38. The Commission found that “McCollum and Brown did not have the caрacity to enter into representation agreements with” Megaro. J.A. 39.
The Commission determined that by “entering into a representation agreement with his clients when he knew they did not have the capacity to understand,” Megaro‘s conduct
was deceitful, fraudulent and dishonest and violated the North Carolina Rules of Professional Conduct. J.A. 40. The Commission issued a judgment and a disciplinary order, which suspended Megaro‘s license to practice in the state of North Carolina for five years and required him to pay restitution if he wanted to be reinstated at the end of that time period.
Halscott Megaro opposed the motion to dismiss and also moved for the district
Halscott Megaro timely appealed, and we have jurisdiction pursuant to
II.
We begin with our standard of review. We review the district court‘s ruling on a motion to dismiss under Rule 12(b)(6) de novo. Harvey v. Cable News Network, Inc., 48 F.4th 257, 268 (4th Cir. 2022). In doing so, we must determine whether the complaint alleges sufficient facts “to raise a right to relief above the speculative level” and “to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007).
Generally, our review is limited to the well-pled facts in the complaint viewed in the light most favorable to the plaintiff. “A motion to dismiss under Rule 12(b)(6) tests the sufficiency of a complaint; importantly, it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.” Republican Party of N. Carolina v. Martin, 980 F.2d 943, 952 (4th Cir. 1992) (citation omitted); Goldfarb v. Mayor & City Council of Baltimore, 791 F.3d 500, 508–12 (4th Cir. 2015) (a motion to dismiss under Rule 12(b)(6) doеs not typically resolve the applicability of defenses to a well-pled claim). But affirmative defenses can be considered in resolving Rule 12(b)(6) motions when the facts surrounding the defense are clear from the complaint. Richmond, Fredericksburg & Potomac R. Co. v. Forst, 4 F.3d 244, 250 (4th Cir. 1993).
Courts are limited to considering the sufficiency of the allegations set forth in the complaint and the “documents attached or incorporated into the complaint.” E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 448 (4th Cir. 2011) (citation omitted). Under
III.
Halscott Megaro argues that the district court erred in granting the motion to dismiss by improperly considering matters outside the four corners of the complaint—namely, the Commissiоn‘s decision. The firm insists this effectively converted a Rule 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment. It also
Halscott Megaro‘s arguments raise three primary issues. First, is the Commission‘s decision an appropriate matter of public record for which the district court could take judicial notice, and does it have preclusive effect against Megaro? If so, under North Carolina preclusion law, is the firm in privity with Megaro such that it was precluded from re-arguing issues resolved against Megaro by the Commission? And finally, do the complaint аnd the Commission‘s decision clearly establish that the firm‘s equitable claims are barred by the doctrines of unclean hands and laches? We consider these questions in turn.
A.
First, we consider whether the Commission‘s decision was an appropriate matter of public record for the district court to have considered by judicial notice. As noted above, a court may take judicial notice of “matters of public record” and other information that would constitute adjudicative facts under
The Commissiоn‘s decision on Megaro is a publicly available record. See Hall v. Virginia, 385 F.3d 421, 424 n.3 (4th Cir. 2004) (recognizing that voting statistics were available on the state‘s official website). It is also an administrative decision from a body acting in a judicial capacity. In North Carolina, the Bar is an agency of the state of North Carolina.
The Commission here acted in a judicial capacity. It held a five-day hearing. Megaro was represented by counsel. Evidence was introduced. And after an adverse decision, Megaro appealed to the North Carolina Court of Appeals. The North Carolina Court of Appeals affirmed the Commission‘s order, concluding that the order‘s “findings of fact support the conclusion that [Megaro] knew McCollum and Brown did not have the capacity to understand the representation agreement or settlement agreement.” N. Carolina State Bar v. Megaro, 880 S.E.2d 401, 409 (N.C. Ct. App. 2022).
The district court did not have the benefit of the North Carolina Court of Appeals order which was issued after the district court‘s opinion; therefore, it could not unequivocally state the Commission‘s decision had been judicially reviewed. However, it correctly applied the governing test from University of Tennessee v. Elliott, 478 U.S. 788 (1986), to determine whether the administrative body was acting in a judicial capacity and whether the state court would givе preclusive effect to the administrative decision. See Davenport v. N. Carolina Dep‘t of Transp., 3 F.3d 89, 93 n.4 (4th Cir. 1993). Under that test, federal
But the existence of the North Carolina Court of Appeals order changes the analysis slightly for us. We do not have to assume what credit a state court would give the administrative decision because a state court has now issued a judgment. “Federal courts must give the same preclusive effect to a state court judgment as the forum that rendered the judgment would have given it” under the Full Faith and Credit Act,
B.
Second, we consider whether the state court judgment against Megaro and the allegations in the complaint clearly establish that the firm was in privity with Megaro such that the firm is precluded from seeking to enforce the retainer agreement just as Megaro would. To do that, we apply North Carolina law.4 Sartin, 535 F.3d at 287 (applying North Carolina law to determine the preclusive effect of a default judgment). And this issue involves two questions. One, what are thе parameters of North Carolina preclusion law?
And two, would North Carolina‘s privity doctrine extend the preclusive effect to Halscott Megaro?
1.
The preclusion doctrine—including that of North Carolina—consists of both res judicata and collateral estoppel. Sartin, 535 F.3d at 287. This appeal involves collateral estoppel. That doctrine bars the re-litigation of specific issues that were actually determined in a prior action. Id. Under North Carolina law, “the determination of an issue in a prior judicial or administrative proceeding precludes the
Like the district court, we have no trouble concluding that the Commission‘s decision meets these requirements. Megaro and the North Carolina State Bar actually litigated the question of whether the retainer agreement that Megaro signed on behalf of the firm constituted an unenforceable contract. Further, the facts that led to the Commission‘s decision that the retainer agreement was invalid—McCollum and Brown‘s limited intellectual capacity, Megaro‘s knowledge of those limitations and his decision to manipulate them into signing the agreement—were material, relevant and essential to the Commission‘s findings of unethical conduct by Megaro.
2.
But there is a wrinkle here. Megaro, individually, was the party in the North Carolina disciplinary proceeding, not Halscott Megaro, the firm. So, is the firm bound by the order? Answering that question involves the doctrine of privity.
North Carolina courts have consistently held that where a party would be collaterally estopped, a person in privity with that party is also estopped. Whitacre P‘ship, 591 S.E.2d at 893; see also Sykes, 828 S.E.2d at 494 (“Collateral estoppel precludes parties and parties in privity with them from retrying fully litigated issues that were decided in any prior determination and were necessary to the prior determination.“) (cleaned up). In other words, when parties are in privity, “courts will look beyond the nominаl party whose name appears on the record as plaintiff and consider the legal questions raised as they may affect the real party or parties in interest.” Whitacre P‘ship, 591 S.E.2d at 893 (internal citation and quotation marks omitted). In the context of collateral estoppel, privity “denotes a mutual or successive relationship to the same rights of property.” Id. (internal citation and quotation marks omitted).
The district court held that Megaro was in privity with his law firm for the issues discussed in the Commission‘s decision. In reaching this decision, the court first identified the “mutual or successive relationship to the same rights of property” test for privity. J.A. 319 (quoting State ex rel. Tucker v. Frinzi, 474 S.E.2d 127, 128 (N.C. 1996)). The court then relied on the allegаtions in the complaint that Megaro is a partner of the law firm and, on behalf of the firm, met with McCollum and Brown and executed the agreement outlining duties to be performed by the firm. And it concluded stating “[t]here is no credible argument that the plaintiff law firm and Megaro are not in privity.” J.A. 319.
In challenging this conclusion, Halscott Megaro argues “the Court expends great efforts to not just establish a privity of Megaro and [the firm], who are undoubtedly separate entities, but goes further to
[t]he District Court makes a legal finding of privity with Megaro and [the firm], which would require a fаctual determination that it did not perform and that it cannot rely on the [Commission] having performed. There is no analysis of which acts in the North Carolina State Bar order of discipline apply to Megaro and which apply to Halscott Megaro.
Id. at 15.
We disagree. First, the district court did not treat Megaro and the firm as if they were a single entity. In fact, if it had, there would have been no need to evaluate privity. And the court identified the correct legal test to analyze that issue. It then noted that Megaro was a partner in the firm and was acting on behalf of the firm in meeting with McCollum and Brown about the retainer agreemеnt. So, contrary to Halscott Megaro‘s argument, the district court applied the proper legal test to undisputed facts, which it gleaned from the complaint and the Commission‘s decision. Halscott Megaro‘s argument to the contrary simply misconstrues the district court‘s decision. Because the Commission and the Court of Appeals found that the retainer agreement was invalid, there is no valid contract upon which to support a breach of contract cause of action. Accordingly, we affirm the district court‘s granting of the motion to dismiss the breach of contract claims brought against Brown and his guardian.
C.
Third, wе consider the district court‘s dismissal of Halscott Megaro‘s claims for unjust enrichment and quantum meruit based on the doctrines of unclean hands and laches. Under North Carolina law, “unjust enrichment is a claim in quasi contract or a contract implied in law.” Butler v. Butler, 768 S.E.2d 332, 336 (N.C. Ct. App. 2015) (internal citation and quotation marks omitted). To establish unjust enrichment, a party must show “(1) a measurable benefit was conferred on the defendant, (2) the defendant consciously accepted that benefit, and (3) the benefit was not conferred officiously or gratuitously.” Primerica Life Ins. Co. v. James Massengill & Sons Const. Co., 712 S.E.2d 670, 677 (N.C. Ct. App. 2011) (citing Progressive Am. Ins. Co. v. State Farm Mut. Auto Ins. Co., 647 S.E.2d 111, 116 (N.C. Ct. App. 2007)). And quantum meruit “is a measure of recovery for the reasonable value of services rendered in order to prevent unjust enrichment.” Whitfield v. Gilchrist, 497 S.E.2d 412, 414 (N.C. 1998). Relevant here, “an attorney who has provided legal service pursuant to a contingency fee agreement and [was] fired has a viable claim in North Carolina in quantum meruit against the former client or its subsequent representative.” Guess v. Parrott, 585 S.E.2d 464, 468 (N.C. Ct. App. 2003).
Halscott Megaro bases its claim for unjust enrichment and quantum meruit on the services the firm provided to McCollum and Brown. The firm alleges that the “parties were operating on a quantum meruit basis following a ruling by Judge Terrence Boyle [] that McCollum‘s fee arrangement contained some language issues and that it needed revision.” J.A. 58. And it maintains that “[n]o challenge or invalidation of the signed retainer agreement occurred during the pendency of the underlying civil rights action as it pertained to Brown and Gilliam.” J.A. 58. The firm alleges it conferred the benefits of representation and expended significant sums of money in representing McCollum and Brown. And it asserts that its former
Despite these allegations, the district court, relying largely on the findings and conclusions of law from the Commission‘s decision, held that the doctrine of unclean hands and laches barred Halscott Megaro‘s equitable claims. In challenging that decision, Halscott Megaro argues that the district court failed to recognize that the Commission‘s order actually explained the amount of work Megaro performed for McCollum and Brown.
But we find no error in the district court‘s analysis. Regardless of any discussion about the amount of work Megaro performed, the Commission concluded that “[b]y entering into a representation agreement with his clients when he knew they did not have the capacity to understand the agreement, [Megaro] engaged in conduct involving dishonesty, fraud, deсeit or misrepresentation in violation of Rule 8.4(c) and engaged in conduct prejudicial to the administration of justice in violation of Rule 8.4(d).” J.A. 40. The Commission also found that Megaro charged an improper fee by claiming an irrevocable interest in McCollum and Brown‘s potential financial payments from the civil rights action. And the Commission determined that collecting one-third of the North Carolina statutory award for McCollum and Brown‘s wrongful convictions was an excessive fee in violation of the North Carolina Rules of Professional Conduct since most of the work had been done before the firm was even involved. Sеe
In North Carolina, the “clean hands doctrine denies equitable relief only to litigants who have acted in bad faith, or whose conduct has been dishonest, deceitful, fraudulent, unfair, or overreaching in regard to the transaction in controversy.” Collins v. Davis, 315 S.E.2d 759, 762 (N.C. Ct. App. 1984) (citation omitted). We find no reversible error in the district court‘s determination that the findings and conclusions of law from the Commission‘s decision establish that Megaro and by extension his law firm, sought relief from the district court with unclean hands.
What‘s more, in its decision, the district court cited Law Offices of Peter H. Priest, PLLC v. Coch, 780 S.E.2d 163, 164–65 (N.C. Ct. App. 2015). There, a law firm and its principal attorney sued their clients for breach of contract and other equitable claims. The North Carolina Court of Apрeals held that former clients could use the law firm‘s violation of the North Carolina Rules of Professional Conduct to avoid liability to the firm. Id. at 172. It reasoned “that an attorney‘s failure to comply with the Rules of Professional Conduct can indeed function as a bar to recovery in a subsequent action for attorney fees.” Id. at 172. And “although an attorney‘s violation of the Rules does not give rise to an independent cause of action,” neither the case law nor commentary to the Rules of Professional Conduct prohibit “defensive use of such violations against a lawsuit subsequently initiated by the same attorney.” Id. Law Offices of Peter H. Priest, therefore, supports the district court‘s decision.
Thus, we affirm the dismissal of the firm‘s equitable claims based on the doctrine of unclean hands. And because we reach this conclusion, we need not discuss the former clients’ laches defense.
IV.
Last, Halscott Megaro also argues that the district court erred in failing to recuse itself from consideration of the case under
the court held that Halscott Megaro failed to identify any facts which would cause one to reasonably question the court‘s impartiality.
We review a district court‘s denial of a motion for recusal for abuse of discretion. Kolon Indus. Inc. v. E.I. DuPont de Nemours & Co., 748 F.3d 160, 167 (4th Cir. 2014). We find none here. The firm‘s allegations of impartiality were not related to any particular facts, sources or statements. A presiding judge is not required to recuse himself simply because of unsupported or highly tenuous speculation. See United States v. Cherry, 330 F.3d 658, 665 (4th Cir. 2003). So, we affirm the district court‘s denial of Halscott Megaro‘s motion to recuse.
V.
For the reasons set forth above, we affirm the district court‘s dismissal of Halscott Megaro‘s action and dismiss the appeal in part for lack of jurisdiction.6
AFFIRMED IN PART, DISMISSED IN PART